2023 (7) TMI 1207 - AT - Income Tax

Rejection of books of accounts - Presumption to the books of accounts u/s 132(4A) - Estimation of income - bogus purchases - estimations of profits at higher percentage of 10% of contract receipts - violation of Section 40A(3) and verified employee expense - estimation of taxable income and manner and extent of estimations - HELD THAT - We find that the CIT(A) has given a rather objective consideration to the factual matrix and has analyzed the fact situation usage of the trade and the common practices adopted in the contract business and has approached the issue in a quite reasonable and fair manner. CIT(A) has given due weight to the nature of business carried out by the assessee. We concur with the findings of the CIT(A) that while the assessee has attempted to correlate and collate the factual matrix to justify the books results there are visible fill-in gaps which has not been filled warranting estimates of profits in a fair and nonpartisan manner. Except for making reference to some hand bills remaining unpaid and lack of evidences towards transportation unsupported statement of low rung employee etc the AO has also not brought out specific defects in the books despite drastic action of search. CIT(A) to our mind has rightly rejected the books of account and set aside book results for fair and benign estimations of profits and to shun absurdity in the income assessed. While the assessee has provided justifications towards large creditors arising year after year such justifications are largely circumstantial and abstract. The outstanding creditors of such significant amounts in the context do invoke disquiet. It is indeed difficult to appreciate the correctness of book results in an objective manner. The AO has made wide ranging observations against the assessee. - Action the CIT(A) sustained. Presumption to the books of accounts u/s 132(4A) - The Hon ble Kerala High Court in the case of CIT (central) Kochi vs. Damac Holdings (P) Ltd. 2017 (12) TMI 1170 - KERALA HIGH COURT observed that in the case seizure of documents in the course of search the presumption under 132(4A) would be equally available to the assessee as well. The contents of books and documents found in possession and control of searched person thus shall be deemed to be true and the presumption would apply to both sides and such presumption thus in effect a double edged sword. The presumption of correctness of entries found in the books at the time of search has not been rebutted by the revenue. Excessive estimation of net profit ratio - assessee has challenged the net profit ratio estimated by the CIT(A) @ 10% instead of 8% adopted under presumptive scheme of taxation provided u/s 44AD - HELD THAT - We do not see merit in the plea of the assessee for such indulgence. The issue is highly factual and varies from case to case. The income estimated at 8% in the case of Subodh Gupta (supra) is based on its own set of facts. The judgment in Subodh Gupta 2014 (12) TMI 479 - DELHI HIGH COURT cannot be read to mean that net profit ratio of 8% is sacrosanct percentage in all circumstances. The CIT(A) in his wisdom has estimated profit at 10% after considering host of circumstances such a quality of evidence made available to support other sundry creditors large cash expenses incurred the net profit ratio declared and net profit ratio determined by the Assessing Officer etc. The law has not invented any straight jacket formula to judge such estimations precisely. Such estimations are in the realm of probabilities. There is nothing conclusive about it. The estimations carried out by the CIT(A) cannot be said to be marred by any kind of perversity. The estimates of profits by the CIT(A) are not fanciful or whimsical but appears to be guided by the principles of objectivity fairness and considerations of justice and maintains some sort of equilibrium. We thus are not inclined to interfere and re-estimate the estimations made by the CIT(A) in the absence of any palpable overreach on this score. Treatment of interest on fixed deposits as integral part of business activity - It is common knowledge that the large scale guarantees and securities are required in contract businesses. The factual matrix also underscores the proposition that the fixed deposits have not been placed to enjoy interest income simplicitor out of any surplus money. Circumstantially large scale outstanding liabilities suggests otherwise. Coupled with this the assessee has also incurred interest and finance costs. The contention of the assessee accepted that such FDRs are nothing but integral part of working capital of the assessee kept and expanded for commercial reasons. Hence the interest income deserves to be treated alike with business contract receipts for the purposes of estimations. The interest income cannot be treated differently from contract receipts merely because such income flows from a different source. - Order of CIT(A) modified to this extent. The interest income and similarly discount credits shall thus form integral part of the business receipts and shall be subjected to estimation at same rate of 10% as made applicable to contract receipts. However the interest income on IT refunds and NSC deposits will not get the benefit of estimations but will be chargeable as other income in accordance with law. Exclusion of exempted income - Assessee has claimed that share of profit arising from joint venture in some assessment years are fully exempted from taxation u/s 10(2A) of the Act. Needless to say where the income is exempt from the ambit of taxation under the provisions of the Income Tax Act same has to be excluded from the taxability at the threshold. Thus the AO is directed to do so by determining the taxable income. Appeal of the assessee is partly allowed while the appeal of the Revenue is dismissed on all counts.

Summary

Issues Involved:
1. Rejection of books of account and estimation of net profit.
2. Deletion of addition by CIT(A) regarding bogus purchases and sundry creditors.
3. Violation of Section 40A(3) regarding cash payments.
4. Disallowance of employee expenses.
5. Treatment of interest income from fixed deposits.

Summary:

Issue 1: Rejection of Books of Account and Estimation of Net Profit
The Tribunal upheld the CIT(A)'s decision to reject the books of account of the assessee under Section 145(3) due to discrepancies and lack of corroborative evidence. The CIT(A) estimated the net profit at 10% of the gross receipts from the contract business after excluding other income like interest from FDRs, IT refunds, NSC interest, and share of profit from JV. The Tribunal found this approach reasonable and fair, considering the nature of the business and the evidence available.

Issue 2: Deletion of Addition by CIT(A) Regarding Bogus Purchases and Sundry Creditors
The CIT(A) gave partial relief to the assessee by reducing the disallowance from Rs. 15,22,47,537/- to Rs. 3,14,05,653/-. The Tribunal agreed with the CIT(A) that the assessee had provided sufficient evidence to support the existence of sundry creditors and the purchases made. However, the CIT(A) also noted that the assessee failed to fully discharge the onus of proving the genuineness of all purchases, leading to a reasonable estimation of net profit.

Issue 3: Violation of Section 40A(3) Regarding Cash Payments
The Tribunal upheld the CIT(A)'s decision to restrict the disallowance under Section 40A(3) to a reasonable amount. The CIT(A) acknowledged that the nature of the assessee's business required cash payments in remote areas where banking facilities were not available. The Tribunal found that the CIT(A) had correctly balanced the need for disallowance with the practical difficulties faced by the assessee.

Issue 4: Disallowance of Employee Expenses
The CIT(A) restricted the disallowance of employee expenses to a reasonable amount, considering the inconsistencies found in the 24Q return and the lack of evidence for some payments. The Tribunal upheld this decision, noting that the CIT(A) had taken a balanced approach in estimating the disallowance.

Issue 5: Treatment of Interest Income from Fixed Deposits
The Tribunal modified the CIT(A)'s order to include interest income from fixed deposits as part of the business receipts for the purpose of estimation. The Tribunal agreed with the assessee that such fixed deposits were integral to the business operations and used for obtaining bank finance and meeting immediate financing needs. However, interest income on IT refunds and NSC deposits would still be chargeable as other income.

Conclusion:
The appeals of the assessee were partly allowed, and the appeals of the Revenue were dismissed. The Tribunal found the CIT(A)'s approach to be fair and reasonable, with necessary modifications regarding the treatment of interest income from fixed deposits. The net profit estimation at 10% of the contract receipts was upheld, with the inclusion of interest income from fixed deposits for estimation purposes.